Consumer Regulator Seen Pushing Loan Writedowns

As the federal regulator for Fannie Mae and Freddie Mac ponders cutting mortgage-loan balances for more Americans, U.S. House Republicans are eyeing the role of another independent agency – the Consumer Financial Protection Bureau.

Republicans on the House Oversight Committee are accusing the federal government’s newest financial regulator of working behind the scenes to tilt other agencies in favor of cutting mortgage balances for more distressed borrowers, a politically-charged issue known as principal writedowns.

Rep. Darrell Issa (R., Calif.), the oversight panel’s chairman, says he is concerned that the bureau has grown into a lobbying powerhouse on principal reductions and other housing policies he believes could hurt the fragile market.

The issue is the latest source of tension between the CFPB and Republicans critical of any agency they fear is protecting consumers without weighing the impact on the banking system.

“Internal communications indicate the administration’s push for principal writedowns of troubled mortgages was highly political and the rationale behind them dubious,” Mr. Issa said in an interview.

“It’s disconcerting to see evidence that the administration has been pushing another multi-billion dollar initiative that would reward those trying to game the system through strategic defaults, more than homeowners who really needed help keeping current with mortgage payments.”

Mr. Issa’s evidence of the consumer agency’s meddling? A batch of internal documents the CFPB sent the committee just weeks ago to comply with the panel’s request for all paperwork related tied to a $25 billion national mortgage settlement.

While some of the emails, written a year ago, are colorful, there is no smoking gun.

But the messages do reveal some discussions the consumer bureau held early last year with agencies such as the Federal Reserve, the Federal Deposit Insurance Corp., the U.S. Department of Housing and Urban Development and the Office of the Comptroller of the Currency about the mortgage settlement.

Consumer agency aides told other agency staffers that principal writedowns could be done without triggering a wave of consumers who would default simply to receive aid. Still, at least one official was skeptical.

In an email, Federal Reserve economist Jane Dokko, who has done work for the consumer bureau, described the bureau’s rationale for principal reductions as “screwed up” in an email to Eileen Mauskopf, a former Fed economist who is now an associate professor at Johns Hopkins Carey Business School. Dokko added that the “CFPB thinks that giving borrowers asset liquidity makes them better off b/c then they’ll be able to sell their houses.”

The consumer bureau Tuesday was focused on its own agenda. It unveiled proposals that would require companies to beef up their customer-service operations, provide timely alerts about changes in interest-rates and keep better track of mortgage documents.

Update: Jen Howard, a spokeswoman for the consumer bureau, said the following in response to this post: “As we’ve said publicly, principal reduction is one of several tools that can be used to keep people in their homes.”

Corrections and Amplifications: Jane Dokko, an economist at the Federal Reserve who has done work for the Consumer Financial Protection Bureau, criticized the bureau’s rationale for principal reductions as “screwed up.” A blog post today incorrectly said former Federal Reserve Board economist Eileen Mauskopf, now an associate professor at the Johns Hopkins Carey Business School, made those comments.